News Release

Vietnam

The industrial asset challenge in Asia Pacific

2017-05-04T05:00:00Z

By JLL

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VIETNAM, 3 May 2017 - Vietnam Asia Pacific's logistics sector is heating up as two of the world's biggest online retailers, Amazon and Alibaba, expand in the region. China's Alibaba Group Holdings said in March that it would set up a logistics hub in Malaysia; in the same month Amazon is reportedly looking for distribution sites in Australia.

And JLL experts say that lease terms for industrial assets are becoming shorter in some Asia Pacific markets, while differing amounts of supply across markets is also causing investors to rethink their capital strategy.

Supply crunch in core markets

According to Pelham Higgins, Director of Industrial Capital Markets for Japan and South Korea at JLL, demand for logistic assets is undoubtedly on the rise as an expanding middle class and growing wealth spur consumption in Asia's emerging countries, which is causing a reconfiguration of supply chains.

As investment interest intensifies in the core markets of China, Singapore, Australia and Hong Kong, the challenge for potential industrial real estate investors and tenants is the general lack of quality assets, says Higgins. "There is a lot of capital chasing the sector, and quality assets are highly sought-after. Those who hold such assets are very reluctant to part with them."

He explained that most investment-grade assets are held in investment funds in Japan, Singapore, Australia or Hong Kong, and these funds do not want to release the assets, especially if the property is occupied and generating attractive incomes for unit holders. Prices across key markets in Asia have remained high causing yields to be low, says Higgins.

"This is making investors apprehensive in spite of the fact that e-commerce supports the sector's growth," he adds. Buyers are unwilling to pay a large premium, leading to a widening bid/ask spread. "Investors who are trying to enter the market need to get the assets at appropriate cap rates. If they pay too high a price, yields are going to be too low to meet their investment targets."

Leasing limits

Meanwhile, lease terms have become shorter in some Asia Pacific markets. In Japan, for instance, the lease terms sat at between 10 and 15 years a decade ago, however, in recent years lease terms have come down to about 5 to 7 years, noted Higgins. While contract terms have become shorter over the years, yields remain at lowly levels, signalling that investors are willing to accept weaker returns despite a shorter tenure. This is fuelling some concerns that current pricing levels cannot be sustained unless lease terms move back above 10 years.

Looking forward, rising land prices and construction costs will continue to pose a challenge for developers in the core markets. "To get the return that they need, developers would have to charge a higher rent, and there are few tenants who would be willing to pay that," says Higgins, citing that even when there is new supply entering the pipeline, like in Japan, asking rents are so high that occupiers are reluctant to take up units.

Separately, as the cost of debt stays at low levels, asset owners who aren't having problems servicing their debt, would only sell at a high price, he explained. "If you are buying at a really high price, you've got to ask yourself are these assets going to hold their value," he says.

The Appeal of Developing Markets

To overcome these headwinds, Higgins offered some potential solutions. Investors might want to hold out for sellers who could become distressed, he advised. Potential investors should also seek favourable debt terms for the return on equity that they need, he adds.

Investors are increasingly shifting their focus to emerging-market destinations such as India, China, Vietnam and the Philippines. Besides the growth of e-commerce fulfilment centres, investors are also seeking opportunities in smaller units designed to cater to last-mile deliveries.

Across the region, the ongoing structural shortage of modern logistics facilities will continue to boost demand, making industrial real estate one of the most favoured asset classes, says Higgins.